U.S. companies are sick and tired of being sick and tired. Five years after the credit bubble burst and the world settled into a financial gloom, economic uncertainty continues to prevail. The two candidates running for President in November, Democratic incumbent Barack Obama and Republican challenger Mitt Romney, promise to lift that gloom. Each has diagnosed what ails the economy and prescribed cures. But are their diagnoses correct — and will their cures work?
To get a second opinion — actually, a number of them — we asked 11 economists across the country to compare the candidates’ approaches to five key issues. In most cases, they preferred one approach to the other’s. There were sharp disagreements over whose strategy was better (no surprise there). But everyone agreed that no issue exists in a vacuum: for example, trade policy affects corporate expansion, which affects job growth.
There were also a few acknowledgments that in some respects, neither candidate would make much of a difference, given global macroeconomic factors outside their control (like the European debt crisis) and the political polarization of Congress. As one economist put it, “Even the leader of the free world can only do so much.”
Meanwhile, in a separate poll, we asked CFOs to identify the issues that matter most to their businesses and to themselves — and which candidate they would prefer to see in the White House in 2013. The results are presented below.
In no particular order, here are the five key issues and the economists’ opinions of how Barack Obama and Mitt Romney would handle those issues.
Federal Budget Deficit
No discussion of the budget deficit can begin without an examination of the so-called fiscal cliff, the conundrum that U.S. lawmakers must confront before the year is out. If the government permits planned tax increases and spending cuts to go into effect at the beginning of 2013, the combination, unchecked, could well drive the country into a double-dip recession. “The fiscal cliff looms large and real,” says David A. Levy, chairman of the Jerome Levy Forecasting Center. “It would take some pretty sick politics to cascade over the half-trillion-dollar-plus mark into fiscal shock, taking the rest of the world with us.”
Tax policy and spending are at the heart of this issue, and the candidates are virtually at odds on a solution, although neither has really presented a comprehensive plan on overhauling the tax code. President Obama wants to preserve the Bush-era tax cuts for everyone other than families earning more than $250,000 a year. That would mean a rise in top rates for these families from their current 33% and 35% to 36% and 39.6%, depending on the bracket. The President also seeks higher rates on capital gains and dividends for those making more than $200,000 and couples making more than $250,000, and would limit tax savings from itemized deductions and other tax preferences (for those making more than $200,000, $250,000 if married) to 28%. The President would reinstate the federal estate tax at 2009 levels, meaning estates valued at more than $3.5 million would be subject to the tax and face a top rate of 45%.
Governor Romney, on the other hand, favors a fundamental overhaul of the tax code to make it flatter and simpler. Romney would not only make all the Bush tax cuts permanent, but also reduce current rates by 20% each, so the top rate would fall to 28% and the bottom rate to 8%. He would also eliminate the estate tax, as well as taxation on capital gains, dividends, and interest for any taxpayer with an adjusted gross income of up to $100,000. Stark differences, indeed.
“We have the Obama approach, maintaining the tax cuts for lower incomes and raising rates for higher incomes, and the Romney approach, cutting rates across the board,” says Bill LaFayette, owner of Regionomics, an economic and workforce strategy firm. “The problem with Romney’s plan is, how will these tax decreases be offset by spending cuts? Neither I nor many other economists can discern them.”
William Dickens, distinguished professor of economics and public policy at Northeastern University, agrees: “Both Romney and [Vice Presidential candidate Paul] Ryan have not offered a complete budget — just outlines where there are large tax decreases and a few spending cuts that are asterisked. We can’t be talking tax decreases, given the budget situation we face. The Obama budget is closer to reality.”
Of a very different opinion is James Lothian, distinguished professor of finance at Fordham University. “You can’t get any revenue out of taxing the high end — people just work less,” Lothian explains. “The average guy in the middle class doesn’t have this option. And does Obama really think $250,000 a year in income is rich? Two kids in a private college take $100,000 a year right off the top of this, then you add in the mortgage.”
Ernie Goss, Jack MacAllister Chair in Regional Economics at Creighton University, points to federal stimulus policies as budget busters. “Never has so much been done to achieve so little,” he contends. “We’ve wasted a trillion dollars on two stimulus packages between Bush and Obama. We cannot continue to run deficits above a trillion dollars a year. Romney is the better man here — at least he’s talking about smaller government.”
Other economists favor the plan put forth by the National Commission on Fiscal Responsibility, known for co-chairs Alan Simpson and Erskine Bowles. “Simpson-Bowles would lower the deficit and the country’s debt with a reasonable mix of spending cuts and tax increases,” says William Dunkelberg, chief economist at the National Federation of Independent Business, a trade group representing smaller U.S. companies. “The question then becomes who is more likely to implement it or a version of it, and I would have to go with Romney, as the President ignored [the commission’s] recommendations.” (For his part, Ryan, as chairman of the House Budget Committee, voted against sending Simpson-Bowles to Congress in 2010.)
Laurence Kotlikoff, professor of economics at Boston University and co-author (with Scott Burns) of The Clash of Generations, says a pox on both their houses. “Both the candidates are in a world of fairy tales, with Republicans believing in supply-side magic and Democrats believing in demand-side magic,” he says. But when pressed to make a choice, he replies, “We need radical reforms, and for that I’d have to go with the Republicans, if for no other reason than my friend Paul Ryan, who put together a well-thought-out budget plan, is the only grown-up on either side.”
The top corporate tax rate in the United States is 35%, one of the highest rates in the developed world. The average corporate tax rate for the developed countries is 25.4%, according to the Organization for Economic Co-operation and Development (OECD). Romney wants to lower the rate to 25%.
Romney also favors a transition to a territorial tax system. The U.S. currently operates under a worldwide tax system, meaning that business income is taxed at the U.S. rate regardless of where it is earned. Under this collection method, a company pays the corporate tax in the host country, and when profits are repatriated to the U.S., it pays the difference between what was paid the host country and what would have been owed under the U.S. rate. In a territorial tax system, business income is taxed only in the country where it is earned. Most OECD nations have some form of territorial system.
President Obama too favors lowering the corporate tax rate, to 28%, and would establish a minimum tax on multinational corporations’ foreign earnings. He also wants to slash popular tax breaks currently enjoyed by a range of different industries to address the revenue shortfall created by lowering the corporate tax rate. Options mentioned include ending breaks for accelerated depreciation and reducing the deductibility of interest.
Whose plan is better for U.S. companies? “Romney’s territorial tax will assist U.S. companies to bring their profits back home, rather than leave them abroad,” says Kotlikoff. “The tax code right now penalizes U.S. corporations that bring their foreign profits home to invest in the United States.”
While both candidates favor free trade, Romney has appeared to take a tougher stance, particularly with regard to China’s alleged manipulation of the yuan and its penchant for compelling American companies to share their intellectual property as a condition of doing business there. Obama has been more vociferous of late on the subject of China, but has not labeled the country a currency manipulator.
Several economists questioned whether Romney’s harsh rhetoric is politically motivated. “He seems too aggressive on China, and [that] could lead us into a mutually destructive trade war,” Kotlikoff says. “The trade deficit isn’t being caused by China manipulating its currency, but by our country saving next to nothing. The U.S. net national saving rate is now just 1%. Our net domestic investment rate is just 5%. The difference between these percentages is investments by foreigners in our country, which shows up as a trade deficit.”
Dickens agrees that an “unreasonably rigid stance in trade negotiations could lead to exactly the things we don’t want — a trade war that would hurt everybody,” he says. “That said, it is true that some countries gain advantage by manipulating their currency or restricting other nations’ exports. Any Administration worth its salt has to be willing to play a bit of hardball, but for the most part I am not unhappy with the performance of the Obama Administration.”
Dean Baker, co-director of the Center for Economic and Policy Research, says trade policy is vital to America’s economic recovery. “The only short-term way to perk [up] demand is government debt — long-term it has to come from trade,” he explains. “And by that I mean balanced trade, which means getting the dollar down.”
Doing that, however, is a mixed blessing, he acknowledges. “On the one hand it improves our trade positions by making imports more expensive, but on the other hand we have all these big companies that have set up supply chains in China that are gaining a competitive advantage and aren’t anxious to see the dollar fall against other currencies,” Baker says. “Consequently, I don’t see either Obama or Romney being serious about pushing the dollar down.”
Although the U.S. economy expanded slightly faster than initially thought in the second quarter, the rate of growth (1.5%) was deemed too slow to create enough jobs to decrease unemployment. The Federal Reserve now expects gross domestic product to grow between 1.7% and 2% in 2012, and it announced in September that it was launching a third round of quantitative easing, by buying $85 billion in long-term bonds every month through the end of the year.
What will spur job growth, and which candidate’s plan is more apt to achieve it? Certainly, the stakes are big. “The role of the government in boosting the economy is the defining issue of the election,” says Elisabeth Jacobs, a fellow in governance studies at the Brookings Institution. “We have candidates who have very different philosophies in this regard, with President Obama articulating that government is the key instigator behind many business successes, and Governor Romney saying the opposite — that business is best when government gets out of the way.”
Jacobs is more philosophically attuned to the Democrats’ approach. “The government under Obama kept the economy from going into full free fall, and [it ended] up instead in some kind of recovery,” she says. “Pumping money into businesses so they can stay afloat helps Americans have money to keep businesses afloat — a virtuous cycle.”
Fordham’s Lothian demurs. “Obama is part of the problem, not part of the solution, when it comes to spurring job growth,” he charges. “His health-care reforms have created enormous uncertainty for U.S. companies, his regulatory agenda creates major headaches, his financial-services reforms have businesses thinking about moving overseas, and his tax policies dampen entrepreneurial spirit, all of which have a dire impact on jobs. If we have clear policies that companies can follow, the uncertainty will dissipate and hiring will increase.”
A related issue is job training. Despite more than 12.5 million people still searching for work, federal money for the government’s primary training program (the Workforce Investment Act) is 18% lower than it was in 2006 (in 2012 dollars), according to the U.S. Department of Labor.
“American companies are competing in the global marketplace for talent, and this depends on having a highly skilled workforce,” says Jacobs. “Many employers have positions they want to fill, but can’t find the right people to fill them. While both candidates have plans to streamline and coordinate the various federal programs for job training, and both want to see training made easier, Obama has [developed] an actual one-stop program called the American Job Center.”
As for Romney, Jacobs says that with Ryan on the ticket, he might curb federal job-training spending further. “Ryan’s budget plan called for cutting $16 billion from the section of the federal budget that includes workforce development programs, telling me that Romney would likely do the same,” she suggests.
Another issue affecting job growth is immigration reform. “We’re educating all these bright people from foreign countries at our universities, and then sending them home,” says Creighton’s Goss. “We’re subsidizing their educations at taxpayer expense and then losing this young human capital that otherwise would assist our economic growth well into the future. Baby boomers are exiting the workforce here at alarming numbers. Consequently, we need to increase legal immigration to avoid the economic stagnation threatening Japan as their adult population ages. At the same time we hand foreign students a diploma, we should hand them a green card.”
In this regard, Goss believes that President Obama’s immigration policies are “a bit more open than the Republicans,” he says, “not that I would give [Obama] too much credit to do much after the election either.”
The economists also split on this issue, with some saying the Affordable Care Act (ACA) is confusing, costly, and competitively detrimental to U.S. companies, and others extolling health reform as relieving corporations of certain health-care costs. As might be expected, several economists noted Romney’s similar health-care reforms as governor of Massachusetts, and his distancing from them ever since. “Repealing the legislation has arguably become the number-one Republican priority,” Jacobs says.
Not if some economists had their way. “Our health-care system is badly broken, and this is at least a step in the right direction,” says Baker. “No longer will we have a situation of people who get a bad illness, lose their jobs, and then can’t get individual insurance. That’s huge from a societal standpoint. I also like that the ACA sets up cost-control mechanisms for Medicare and longer-term illnesses.”
Kotlikoff is also in the Obama camp on this subject. “If the Republicans win, it will be a disaster for health-care reform, with people with preexisting illnesses locked out and 35 million people back on the uninsured rolls,” he says. “The ACA is actually better for companies, as they can shut down their health-care programs and send them over to the [health insurance] exchanges for a nice, big subsidy. Romney will return us to the system we had under Bush — 50 million uninsured, including 8 million children.”
Lothian takes the counter position, calling the ACA another example of burdensome government regulation. “Just like the financial-services reform legislation [the Dodd-Frank Act], the ACA is convoluted and nebulous — no company really knows how it will be affected or the ultimate expense,” he says. “Insuring people with preexisting conditions alone can end up costing hundreds of millions of dollars at some point.”
“Regulations affect economic growth, which affects jobs,” chimes in Mark Fratrik, vice president and chief economist at market research firm BIA/Kelsey. “You can talk about the benefits of the ACA, but the fact is that it creates uncertainty, which leads to lower employment. A small company doesn’t hire one person it would have otherwise, which adds up.” Fewer regulations, on the other hand, “means more employment, which makes people feel better and more certain about their financial situations, which breeds more spending and investment,” says Fratrik.
The Report Card
To sum up, we asked the economists to grade the candidates on each of the issues discussed above; the average grades are reported at left. For the most part, Romney’s approach to fixing the economy was deemed superior to Obama’s.
Perhaps the best summing up was provided by Bill LaFayette, the economist who commented that no matter who the next President is, he “can only do so much.” LaFayette went on to elaborate: there is “so much contention in our country and gridlock in our Congress that no one person, Republican or Democrat, is likely to improve things well beyond where they are today. There’s a limit to what anybody can do.”
Russ Banham is a contributing editor of CFO.